Ask Money

How am I doing

Chris Farrell Dec 3, 2010

Question: I just listened to The New Frugality on a long car drive to and from LA, and I feel as though I should already be able to answer the question I’m about to ask; but I’d still feel better hearing the answer from you!

I’m 34 and have managed to build up a bit over $100,000 in savings, broken down roughly this way:

  • 10% in a traditional IRA
  • 15% in an index fund
  • 25% in my 401(k)
  • 50% in a regular old savings account

The IRA and 401(k) are both target-date funds, so they’re very heavily weighted toward stocks right now; the index fund is a little more conservative at 60/40. I haven’t seen any gains on those accounts in a while, so I’ve just been contributing 7% of my salary to my 401(k) (which my employer matches about 75% of) and socking the rest of my savings into a regular savings account. I know I should be doing more with that money, but can’t decide whether it makes sense to add more to my stock-heavy funds and trust it’ll work out better in the long term, or put some money into something more conservative like TIPS. By the way, I’m married but we have no plans for kids, and we’re at least a couple of years away from buying a house. What’s your advice for where to put my savings for the long term? Thanks! Philip, San Diego, CA

Answer: Thank you for listening to the book. I enjoyed taping it. The studio is in the Wisconsin countryside, a small barn-like building made out of hay and covered with stucco. The price of heating it a year, about $90! Now, that’s frugal. Hay offers incredible insulation. I wore a sweater when I was taping, but the room was comfortable.

Now to your questions. You’re doing really well on the savings and investing front.

I like Target Date funds if they are well-designed with just a handful of low fee basic options (preferably index funds). I would make sure that the Target Date funds get more conservative as you age. That’s the basic idea behind these funds, but unfortunately some of them are loaded up with stocks even at the retirement date. I know it’s a long, long way off, but you don’t want to be 60 years old with a portfolio that has embeded in it the risk it could lose half its value.

Yes, I do like Treasury Inflation Protected Securities. Inflation remains the enemy of long-term savers. And TIPS genuinely add to a portfolio’s diversification. TIPS are blue-chip credit-worthy ecurities. I think TIPS are a core investment in a long-term retirement savings portfolio (as are stocks). Some Target Date funds offer the option of investing the bond portion of the portfolio in TIPS. I’d check to see if that is an option available to you. If not, you could add TIPS to your IRA.

An alternative is to put money into I-bonds. The advantage of I-bonds is that the inflation-protected tax-sheltered security is part of your long-term savings, but you can always cash in the bonds if you need the money without penalty. (You will pay ordinary income taxes on the gain.)

I would also echo a point I made in a post to Emily from Red Deer. What is your plan? Where do you want to be in several years? I know you have an idea. For instance, you say you hope to buy a home in a couple of years. That suggests you should continue to add to your savings account despite its low yield. But as I wrote to Emily: “Of course, your goals and desires can and will change with time. Yet even a back-of-the-envelope plan will help you decide where to put your money.”

The bottom line: You’re doing really well.

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